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Case 17.4
HALLIBURTON CO. V. ERICA P. JOHN FUND, INC.
Supreme Court of the United States
134 S. Ct. 2398; 189 L. Ed. 2d 339; 2014 U.S. LEXIS 4305 [June 23, 2014]
FACTS:
Respondent Erica P. John Fund, Inc., (EPJ Fund), is the lead plaintiff in a putative class action against
Halliburton and one of its executives (collectively Halliburton) alleging violations of Section 10(b) of
the Securities Exchange Act of 1934, and the Securities and Exchange Commission Rule 10b-5.
According to EPJ Fund, between June 3, 1999, and December 7, 2001, Halliburton made a series of
misrepresentations regarding its potential liability in asbestos litigation, its expected revenue from
certain construction contracts, and the anticipated benefits of its merger with another company—
all in an attempt to inflate the price of the stock.
Halliburton subsequently made a number of corrective disclosures, which, EPJ Fund contends,
caused the company’s stock price to drop and investors to lose money.
Investors can recover damages in a private securities fraud action only if they prove that they relied
on the defendant’s misrepresentation in deciding to buy or sell a company’s stock.
In Basic Inc. v. Levinson [485 U.S. 224 (1998)], the court held that investors could satisfy this
reliance requirement by invoking a presumption that the price of the stock traded in an efficient
market reflects all public, material information—including material misstatements. In such a case
anyone who buys or sells the stock at the market price may be considered to have relied on those
misstatements.
The questions presented to the Supreme Court were whether it should overrule or modify Bacis’s
presumptions of reliance and, if not, whether defendants should nonetheless be afforded an
opportunity in securities class action cases to rebut the presumption at the class certification stage,
by showing a lack of price impact.
PROCEDURE: The District Court certified the class action. The U.S. Court of Appeals for the Fifth Circuit
affirmed and concluded that Halliburton could not use its price impact evidence to rebut the Basic
presumption.
ISSUE: Are securities fraud defendants entitled to use evidence of no market price impact to rebut the
fraud-on-the-market presumption of reliance at the class action certification stage?
RULE: “In Basic it was ‘made clear that the presumption was just that, and could be rebutted by
appropriate evidence,’ including evidence that the asserted misrepresentation (or its correction) did
not affect the market price of the defendant’s stock.”
REASONING:
1. The reliance element “ensures that there is a proper connection between a defendant’s
misrepresentation and a plaintiff’s injury.” The traditional (and most direct) way a plaintiff can
demonstrate reliance is by showing that he was aware of a company’s statement and engaged in a
relevant transaction—e.g., purchasing common stock—based on that specific misrepresentation.”
2. In Basic, the Court recognized that requiring such direct proof of reliance “would place an
unnecessarily unrealistic evidentiary burden on the Rule 10b-5 plaintiff who has traded on an
impersonal market.”
the market price of stock.
ADDITIONAL INFORMATION:
A plaintiff must make the following showings to demonstrate that the presumption of reliance
applies in a given case: (1) that the alleged misrepresentations were publicly known, (2) that they
were material, (3) that the stock traded in an efficient market, and (4) that the plaintiff traded the
stock between the time the misrepresentations were made and when the truth was revealed.
Investors can recover damages in a private securities fraud action only if they prove that they relied
